This news service talks to a senior figure at Northern Trust on topics such as lifetime gifts, estate tax and planning.

This news service interviewed Jane Ditelberg, director of tax planning at Northern Trust Institute, about issues around estate tax, gifts, and the structuring of assets. With an election year, tax changes are front of mind more than usual. Ditelberg is responsible for developing Northern Trust’s perspective and insights on tax, including individual and entity income taxation, employee benefits and executive compensation, estate, GST and gift taxation, and fiduciary income taxation. (More on her below.)

This news service continues to write about the tools at the disposal of HNW individuals and their advisors. Consider this article from US lawyer Matthew Erskine – a regular FWR contributor – for example. The US has a plethora of trusts, life insurance structures, and other tools, that deserve attention. (See another article here.) Navigating all this takes care, however.

Family Wealth Report: HNW and ultra-HNW individuals should assess the timing and magnitude of lifetime gifts, leveraging existing exemptions. Can you elaborate on this, what sort of strategies should be adopted, how the current accelerated gifting approach works, who uses it, pitfalls and risks as well as the upside, etc.?
Ditelberg: Lifetime gifts are an important estate planning strategy, even when there is not a specter of a reduction in the exclusion as there is today. Lifetime gifts of appreciating assets move the appreciation to the beneficiary, and thereby reduce estate tax by excluding the appreciation from the tax base. The trade-off is that there is no step-up in basis for lifetime gifts. 

Without Congressional action, certain provisions of the Tax Cut and Jobs Act will expire at the end of 2025, reducing the exclusion roughly by half (from $13.61 million per taxpayer to an estimated $7 million). A taxpayer who can afford to make a gift of more than $7 million today is using the part of their exclusion that is scheduled to go away – a tax benefit that is not available at death unless the death occurs prior to the end of 2025. 

Making a smaller gift now does not have the same impact. A gift of $5 million now means that the donor will have $2 million of exclusion after the sunset and the additional $6.6 million from the TCJA will vanish.  

Whether the sunset occurs will depend on the make-up of Congress and the identity of the President. The Republicans are campaigning on a plan to make the TCJA provisions permanent, while Democrats are proposing to let the TCJA expire. 

Taxpayers can leverage the exclusion by making gifts that are subject to a discount (for example, a minority interest in a business) or gifts whereby the donor has retained rights to the property (such as a grantor-retained annuity trust (GRAT) or a qualified personal residence trust (QPRT). 

FWR: Have the changes in interest rates in the past few years affected some of the financial merits of this, or not?
Ditelberg: Some gift techniques are interest-rate dependent. GRATs are a prime example, as those are most effective when interest rates are low and become less attractive as interest rates rise. On the other hand, QPRTs are more attractive the higher the interest rates are. In both cases, the benefit is related to how the retained interest of the donor is computed.

Otherwise, interest rates impact the growth projections and that can impact the perceived benefits of all lifetime giving techniques. If the assets grow at a faster rate, then the tax benefit of making gifts sooner rather than later is larger.

FWR: In your view, are accelerated gifting strategies under-used as tools for estate and tax planning and, if so, what's the problem?
Ditelberg:The attractiveness of lifetime gifts is in the eye of the beholder. For many taxpayers, the opportunity to see their beneficiaries benefit from the gift is a powerful incentive, regardless of the tax treatment. Conversely, others are not ready to part with assets or are not ready to put the assets in the hands of their children. Some do not want their children to know the extent of their wealth, or to have the benefit of wealth while they are young. 

Consulting an estate planning expert can help these taxpayers evaluate their donative intent to determine if gifts are consistent with their goals and values, and how to structure the gift to alleviate concerns about too much too soon, etc.

FWR: On potential tax liabilities, the expiry of certain thresholds is well understood (we hope!), so what sort of work are you being asked to advise on, and what trends do you see in the sort of structures/trusts being used? Any specific concrete examples?
Ditelberg: A lot of what we are doing now is financial modeling of the size of a gift a client can afford without impacting their other financial goals, the types of assets that are suitable for gifts, and what types of trusts or other structures a taxpayer may want to use to make a gift. This analysis is important to do ahead of time and won’t be possible if the taxpayer wants to start the process in December 2025. 

In addition, advisors, including accountants, attorneys, appraisers, and financial planners, will be quite busy as the date for the sunset approaches and may be unavailable as we get closer to December 31, 2025.

Clients are at various stages with their plans. Those who are satisfied that making a gift is consistent with their goals are going ahead with gifts regardless of whether the sunset occurs. In addition to charitable gifts, we are seeing gifts to multigenerational dynasty trusts, to trusts for the donor’s spouse and descendants, and gifts to education trusts for children or grandchildren. Other clients are getting their plans in place and having documents drafted but are waiting until closer to the sunset date to make the gift. They may be using this time to create partnerships or LLCs that they will later use to make the gift and getting those entities up and running and funded.

A mistake to avoid is what we refer to as “donor remorse,” something we have seen when tax changes were anticipated in the past. In 2012 and 2016, and to a lesser extent in 2010, we saw clients who were worried about tax law changes making significant gifts and later regretting either that they had made gifts at all or regretting the terms of the gift or the trusts that received the gifts. Careful planning now can avoid complications later.

One type of gift in the news a lot right now considering the sunset is the Spousal Lifetime Access Trust. This is popular for married couples because one spouse makes a gift to a trust that benefits the other spouse and usually the couple’s children or other descendants. It can make sense for couples who want to keep access to the gifted assets, but it can cause serious problems if the couple later divorce. 

FWR: There can always be uncertainties around estate planning in a world where tax is in play, politically. Is the current environment any more difficult than earlier periods? Are there specific issues in play at the moment?
Ditelberg: There are several uncertainties at play right now, and we haven’t seen this particular set of circumstances in recent memory, probably not since the unification of the gift and estate tax in 1976. The first is whether the provisions of the TCJA will sunset. The Republicans are campaigning on making those tax cuts permanent which would eliminate the sunset and the urgency to make gifts now. The administration’s Green Book is premised on allowing the TCJA changes to sunset. 

A second uncertainty is whether the Democrat’s proposal (from the Green Book) for a tax on unrealized appreciation (the so-called billionaire’s tax although it would apply to those having more than $100 million) will be enacted. A part of this is whether a tax on unrealized gain will be held to be unconstitutional in the Moore case currently pending before the Supreme Court. If this tax is enacted, it will create additional incentives to make gifts during life. 

A third issue is whether the proposed change to carry-over basis at death (eliminating the basis step-up) will be enacted. If that is enacted, a major incentive for waiting to make gifts until death to get the basis step up will be eliminated and there will be a greater incentive for those who can afford it to make lifetime gifts.

About Jane Ditelberg
Prior to her current role, Ditelberg spent 15 years in the Legal Department at Northern Trust as Senior Legal Counsel and Assistant General Counsel, where she advised the National Trust and Advisory Practice on legal issues related to Northern Trust’s role as trustee, executor and guardian. Before Northern Trust, she spent a combined 17 years in the private practice of law with Foley & Larder and then Sidley LLP in Chicago, where her practice was limited to trusts, estates, and related areas of taxation. As part of her practice, she oversaw the preparation and filing of tax returns, provided covered tax advice, handled tax audits and filed numerous requests for private letter rulings with the IRS.